Shared Supplier Capacity as a Barrier to Ethical Sourcing

Abstract

Motivated by conversations with practitioners, this experimental paper considers (1) the production decisions (e.g., late stage Rejection, production by In-House Capacity, and production by Unauthorized Capacity) of a capacity constrained Supplier who faces a portfolio of different Buyer firms and (2) the effectiveness of Buyers’ potential strategic responses to the Supplier’s choices. We consider both the relevant operational (e.g., Wholesale Price and Order Volume) and non-operational (e.g., the generosity of Buyer’s Retail Price relative to the Wholesale Price offered) information used by the Supplier when making their choice. Additionally, using both a between, and within, subject design we show that Supplier's do consider Buyers' Retail Price when making their production decisions, and identify the key psychological drivers of this behavior. Finally, we consider how a savvy Buyer can use this information to decrease the likelihood that their order is produced using unauthorized capacity.

Keywords: sustainable sourcing, outsourcing, procurement